UNITED STATES POSTAL SERVICE

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Draft February 8, 2021 (8.0)

UNITED STATES

POSTAL REGULATORY COMMISSION

Washington, D.C. 20268-0001

__________________________________________________________________________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO 39 U.S.C. § 3654 AND SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2020 __________________________________________________________________________________________

__________________________________________________________________________________________

UNITED STATES POSTAL SERVICE

(Exact name of registrant as specified in its charter) __________________________________________________________________________________________

Washington, D.C. 41-0760000

(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 475 L’Enfant Plaza, S.W.

Washington, D.C. 20260

(Address of principal executive offices) (ZIP Code)

(202) 268-2000

(Registrant’s telephone number, including area code)

__________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ¨ Not Applicable þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ Not Applicable þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨

Smaller reporting company ¨ Emerging growth company ¨ Not applicable þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered

Not applicable Not applicable Not applicable

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TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION 3

Item 1. Financial Statements 3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of

Operations 18

Item 3. Quantitative and Qualitative Disclosures About Market Risk 33

Item 4. Controls and Procedures 33

PART II: OTHER INFORMATION 35

Item 1. Legal Proceedings 35

Item 1A. Risk Factors 35

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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

UNITED STATES POSTAL SERVICE STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended December 31,

(in millions) 2020 2019 Revenue: Operating revenue $ 21,495 $ 19,351 Other revenue 3 3 Total revenue 21,498 19,354 Operating expenses:

Compensation and benefits 13,279 12,508

Retirement benefits 1,791 1,615

Retiree health benefits 1,200 1,225

Workers’ compensation (278) (202)

Transportation 2,601 2,397

Other operating expenses 2,554 2,536

Total operating expenses 21,147 20,079

Income (loss) from operations 351 (725)

Interest and investment income 8 41

Interest expense (41) (64)

Net income (loss) $ 318 $ (748)

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UNITED STATES POSTAL SERVICE BALANCE SHEETS

(in millions) December 31, 2020 September 30, 2020

(Unaudited)

Current Assets:

Cash and cash equivalents $ 15,171 $ 14,358

Restricted cash 560 354

Receivables, net (less allowances of $123 and $87) 1,349 1,359

Supplies, advances and prepayments 286 224

Total current assets 17,366 16,295

Property and equipment, net 14,599 14,567

Operating lease right-of-use assets 4,487 4,488

Other assets 567 554

Total assets $ 37,019 $ 35,904

Current Liabilities:

Compensation and benefits $ 3,326 $ 2,788

Retirement benefits 12,343 11,583

Workers’ compensation 1,259 1,320

Payables and accrued expenses 2,460 2,328

Deferred revenue-prepaid postage 2,729 2,489

Operating lease liabilities 1,220 1,206

Customer deposit accounts 1,188 1,260

Other current liabilities 1,386 1,336

Short-term debt 3,000 3,000

Total current liabilities 81,976 79,175

Workers’ compensation, noncurrent 17,217 18,754

Operating lease liabilities, noncurrent 3,402 3,425

Employees’ accumulated leave, noncurrent 2,195 2,201

Other noncurrent liabilities 1,661 2,057

Long-term debt 11,000 11,000

Total liabilities 117,451 116,612

Net Deficiency:

Capital contributions of the U.S. government 3,132 3,132

Deficit since 1971 reorganization (83,564) (83,840)

Total net deficiency (80,432) (80,708)

Total liabilities and net deficiency $ 37,019 $ 35,904

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UNITED STATES POSTAL SERVICE STATEMENTS OF CHANGES IN NET DEFICIENCY

(UNAUDITED) For the three months ended December 31, 2019

(in millions) Capital Contributions of U.S. Government Accumulated Deficit Since

Reorganization Total Net Deficiency Balance, September 30, 2019 $ 3,132 $ (74,664) $ (71,532)

Net loss — (748) (748)

Balance, December 31, 2019 $ 3,132 $ (75,412) $ (72,280)

See accompanying notes to the unaudited financial statements.

For the three months ended December 31, 2020

(in millions) Capital Contributions of U.S. Government Accumulated Deficit Since

Reorganization Total Net Deficiency Balance, September 30, 2020 $ 3,132 $ (83,840) $ (80,708)

Cumulative effect adjustment for adoption of new accounting

pronouncement — (42) (42)

Net income — 318 318

Balance, December 31, 2020 $ 3,132 $ (83,564) $ (80,432)

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UNITED STATES POSTAL SERVICE STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions) 2020 2019

Cash flows from operating activities:

Net income (loss) $ 318 $ (748)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization 419 431

Loss (gain) on disposals of property and equipment, net 4 (2)

Lease expense 1 71

Increase in other assets (13) (28)

Decrease in noncurrent workers’ compensation (1,537) (1,524)

Decrease in noncurrent deferred appropriations and other

revenue (1) (1)

Net lease liabilities (9) 60

Decrease in other noncurrent liabilities (356) (39)

Changes in current assets and liabilities:

Receivables, net (32) 96

Other current assets (62) (86)

Retirement benefits 760 637

Payables, accrued expenses and other 594 (399)

Deferred revenue-prepaid postage and other deferred

revenue 242 (3)

Net cash provided by (used in) operating activities 1,528 (310) Cash flows from investing activities:

Purchases of property and equipment (505) (418)

Proceeds from sales of property and equipment 4 8

Net cash used in investing activities (501) (410) Cash flows from financing activities:

Payments on finance lease obligations (8) (11)

Net cash used in financing activities (8) (11)

Net increase (decrease) in cash, cash equivalents &

restricted cash 1,019 (731)

Cash, cash equivalents & restricted cash - beginning of

period 14,712 9,161

Cash, cash equivalents & restricted cash - end of period $ 15,731 $ 8,430 Supplemental cash flow disclosures:

Cash paid for interest $ 33 $ 56

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NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

Interim Financial Statements

The accompanying unaudited interim financial statements of the United States Postal Service (the “Postal Service”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of the U.S. Securities and Exchange Commission Regulation S-X. These financial statements should be read in conjunction with the Postal Service’s financial statements for the year ended September 30, 2020 included in its Annual Report on Form 10-K (“Annual Report”) filed with the Postal Regulatory Commission (“PRC”) on November 13, 2020, and do not include all information and footnotes which are normally included in the Annual Report. Except as otherwise specified, all references to years are to fiscal years beginning October 1 and ending September 30, and quarters are quarters within fiscal years 2021 and 2020.

In the opinion of management, the accompanying unaudited interim financial statements reflect all material adjustments, including recurring adjustments, necessary to fairly present the financial position as of December 31, 2020, the results of operations for the three months ended December 31, 2020 and 2019, the changes in net deficiency for the three months ended December 31, 2020 and 2019, and cash flows for the three months ended December 31, 2020 and 2019. Operating results for the three months ended December 31, 2020 are not necessarily indicative of the results that may be expected for all of 2021. Mail volume and revenue are historically greatest in the first quarter of the year, which includes the holiday mailing season.

NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update 2016-13 Financial Instruments - Credit Losses

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13 Financial Instruments - Credit Losses, which has since been codified in Accounting Standards Codification (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”). The new standard requires entities to measure expected credit losses on financial instruments and other commitments by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Postal Service adopted ASC 326 on October 1, 2020. Upon adoption, the Postal Service adjusted its allowance for credit losses by $42 million, resulting in an opening Balance Sheet adjustment as of October 1, 2020, reducing Receivables, net and increasing the Deficit since 1971 reorganization by this amount. The adoption of ASC 326 did not have an impact on the accompanying unaudited Statement of Operations or

Statement of Cash Flows.

Accounting Standards Update 2018-15 Intangibles - Goodwill and Other - Internal-Use Software

In August 2018, the FASB issued Accounting Standards Update 2018-15 Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud

Computing Arrangement, which has since been codified in ASC Subtopic 350-40, Intangibles - Goodwill and

Other - Internal-Use Software (“ASC 350-40”). This is an update to a standard the FASB issued in April 2015 for

entities evaluating the accounting for fees paid by a customer in a cloud computing (hosting) arrangement. The update reduces the complexity of accounting for costs of implementing a cloud computing service arrangement by aligning the guidance for capitalizing these implementation costs, regardless of whether such arrangements include a software license.

The Postal Service adopted ASC 350-40 prospectively on October 1, 2020. There was no material impact in the three-month period ended December 31, 2020.

Accounting Standards Update 2018-13 Fair Value Measurement

In August 2018, the FASB issued Accounting Standards Update 2018-13 Fair Value Measurement: Disclosure

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codified in ASC 820, Fair Value Measurement (“ASC 820”). The new standard modifies the disclosure requirements for fair value measurements by adding, modifying or removing certain disclosures.

The Postal Service adopted ASC 820 on October 1, 2020. The adoption of ASC 820 had no impact on its financial statements but amended the information disclosed in Note 12 - Fair Value Measurement.

NOTE 3 - LIQUIDITY

The Postal Service’s liquidity consists of unrestricted cash and cash equivalents plus authorized borrowing capacity under the Postal Reorganization Act, as amended by Public Laws 101-227 and 109-435 (the "PRA").

Cash

The Postal Service generates its cash almost entirely through the sale of postal products and services. The Postal Service holds its Cash and cash equivalents and Restricted cash with the Federal Reserve Bank of New York and invests its excess cash, when available, in highly-liquid, short-term investments issued by the U.S. Department of the Treasury (“U.S. Treasury”).

As of December 31, 2020 and September 30, 2020, the Postal Service held unrestricted cash and cash equivalents of $15.2 billion and $14.4 billion, respectively.

In March 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act, enacted as Public Law 116-136 (the “CARES Act”). The CARES Act offered certain employers the ability to defer payment of the employer’s share of the Social Security payroll tax on wages from March 27, 2020 through December 31, 2020. In accordance with this provision, the Postal Service had deferred approximately $1.8 billion as of December 31, 2020. One half of these deferred payments is due by December 31, 2021 and is recorded within

Compensation and benefits in the accompanying Balance Sheets. The other half is due by December 31, 2022

and is recorded within Other noncurrent liabilities in the accompanying Balance Sheets.

As of December 31, 2020 and September 30, 2020, the Postal Service held restricted cash of $560 million and $354 million, respectively. Restricted cash represents Postal Service cash that is not available for general use. This includes cash originated from forfeitures or seizures related to consumer fraud or other criminal activity related to the mail and either held for third-party beneficiaries or awaiting disposition. Restricted cash also includes funds designated for specific use due to congressional appropriation for Postal Service obligations to the PRC and the United States Postal Service Office of Inspector General, or that are otherwise restricted.

Debt

The PRA authorizes the Postal Service to raise cash through the issuance of debt obligations. The PRA requires the Postal Service to notify the Secretary of the Treasury of its intent to issue debt, allowing the U.S. Treasury the first option to purchase such obligations. However, if the Secretary of the Treasury elects not to purchase such obligations, the PRA authorizes the Postal Service to issue and sell such obligations to a party or parties other than the U.S. Treasury, which may include a transaction in the public or private debt markets. Under the PRA, the Postal Service is limited by statute to annual net increases in debt of $3.0 billion calculated as of the end of each fiscal year, and total debt of $15.0 billion.

As of December 31, 2020 and September 30, 2020, the aggregate principal of all debt outstanding was $14.0 billion, all of which was issued to the Federal Financing Bank (“FFB”), a government-owned corporation under the general supervision of the Secretary of the Treasury. Of this amount, $3.0 billion relating to a revolving credit facility must be repaid by April 2, 2021 and is recorded within Short-term debt in the accompanying Balance

Sheets. The remaining $11.0 billion relating to a combination of fixed-rate and floating-rate notes with various

maturities is recorded as Long-term debt in the accompanying Balance Sheets. As of December 31, 2020, the Postal Service had $1.0 billion in remaining borrowing capacity under the PRA.

Notwithstanding the $15.0 billion statutory debt limit and the $3.0 billion limit on annual borrowing, the CARES Act allows the Postal Service to receive up to an additional $10.0 billion in financing from the U.S. Treasury to fund operating expenses associated with the COVID-19 pandemic. On December 27, 2020, the President signed Public Law 116-260, the Consolidated Appropriations Act, 2021, amending the CARES Act to remove the repayment requirement for any amounts received under the $10.0 billion borrowing authority. This legislation altered the basis of the previously reported agreement in principle reached with the U.S. Treasury in July 2020

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and new terms and conditions were required to be established before the Postal Service could access any funds.

On January 19, 2021, the Postal Service and the U.S. Treasury agreed to the terms and conditions applicable to funding under the CARES Act, as amended by the Consolidated Appropriations Act, 2021, nullifying the terms of the agreement in principle from July 2020. Pursuant to this new memorandum of understanding, the Postal Service may request up to $10.0 billion in funding from the U.S. Treasury for COVID-19 related operating expenses which would not bear interest and which would not need to be repaid. Advances under this agreement are subject to certain terms and conditions and approval by the U.S. Treasury.

Liquidity Concerns

The Postal Service reported operating expenses of approximately $82 billion in 2020 and has incurred cumulative net losses of $86.7 billion from 2007 through December 31, 2020. The Postal Service continues to face systemic imbalances that make its current operating model unsustainable. The Postal Service intends to adopt operational reforms to meet the changing needs of its business and residential customers. Absent legislative and regulatory change and operational reforms, the Postal Service projects continuing annual net losses in the future. As a result of these losses and its liquidity concerns, the Postal Service may not have sufficient liquidity to meet all of its existing legal obligations when due while also reducing its debt and making the critical infrastructure investments that have been deferred in recent years.

Furthermore, while the Postal Service has the statutory authority to issue debt obligations within the statutory borrowing authority, it has no assurance that it would be able to raise additional cash through new debt financing with the FFB, or that such financing would be provided on terms comparable to those applicable to its prior debt issuances. Alternatively, if the Postal Service were to use its authority under the PRA to issue and sell obligations to a party or parties other than the FFB, it has no assurance it would be successful in raising additional cash, or that such financing would be provided on terms comparable to those applicable to its prior debt issuances.

COVID-19 Considerations

The coronavirus (“COVID-19”) pandemic continues to have a material effect on certain of the Postal Service’s results of operations. As a result of the pandemic, and to a lesser extent, secular mail declines, the Postal Service’s sales from mail services has continued to decline during the first quarter of 2021. Meanwhile, the Postal Service’s sales from Shipping and Packages, its most labor-intensive revenue stream, has continued to experience substantial growth as a result of the surge in e-commerce driven by the pandemic. While this shift contributes to increased cash flow and overall higher revenue results for the quarter, such results may not be sustained in future periods. Also, Shipping and Packages produces a lower contribution margin per revenue dollar due to higher associated labor and transportation expenses.

During the first quarter of 2021, the U.S. Food and Drug Administration issued two emergency use authorizations permitting the release of vaccines for the prevention of COVID-19. Despite the distribution of these vaccines, the duration of the COVID-19 disruption remains uncertain, and the Postal Service expects that its liquidity may worsen if the nation experiences a prolonged period of disruption and the surge in e-commerce diminishes.

Business Model Challenges and Constraints

The Postal Service is constrained by laws and regulations, including the Postal Accountability and

Enhancement Act (“PAEA”), which restrict revenue sources and mandate certain expenses.

Market-Dominant services, which include, but are not limited to, First-Class Mail, Marketing Mail, Periodicals

and certain parcel services, accounted for approximately 58% of the Postal Service's annual operating revenues in 2020. The prices in effect for Market-Dominant services during the first quarter were established under a price cap system measured by the Consumer Price Index for All Urban Consumers ("CPI-U"). On November 30, 2020, the PRC announced its final decision in connection with its ten-year review of the system for regulating rates and classes for Market-Dominant products, as required by the PAEA, that modifies the price cap system by providing some additional pricing flexibility and authority.

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Unlike the Postal Service’s Market-Dominant prices, the Postal Service's costs are not similarly constrained or capped. Under the price cap system in effect prior to the PRC’s final ruling, the Postal Service has generally been unable to increase prices sufficiently to offset increased costs. As discussed above, the PRC’s final decision will provide the Postal Service with some additional pricing flexibility and authority when determining future price increases. However, the Postal Service is constrained by law, or by contract, from reducing many of its costs or from pursuing many alternate sources of revenue. A large portion of its cost structure cannot be altered expeditiously due to the Postal Service's universal service obligation and many employee and retiree benefit costs are mandated by law and cannot be altered without legislative change.

Because the Postal Service provides its services primarily through its employees, its costs are heavily concentrated in wages and benefits for both current employees and retirees. These costs are significantly impacted by contractual wage increases, employee health benefit premium increases, and statutorily mandated retirement and workers' compensation programs. Some of these costs have historically increased at a higher rate than inflation. See Note 8 - Retirement Plans, Note 9 - Health Benefits Plans and Note 10 - Workers'

Compensation in this document for further information on statutorily mandated costs.

Further, the number of delivery points continues to grow by more than one million per year, which drives up delivery costs. When combined with the impact of lower mail volume, the average number of pieces delivered per delivery point per day has decreased from approximately 5.5 pieces in 2007 to 3.0 pieces in 2020, a decline of approximately 46%.

Past Due Obligations

In order to preserve liquidity and ensure that its ability to fulfill its primary mission is not placed at undue risk, the Postal Service has not made certain payments to the Civil Service Retirement System (“CSRS”) and the Federal Employees Retirement System (“FERS”) for certain retirement benefits, nor has it made certain payments to the Postal Service Retiree Health Benefit Fund (“PSRHBF”) for certain retiree health benefit programs. The following table presents the total expenses accrued but unpaid by the Postal Service as of September 30, 2020 and the fiscal years in which the accruals were recorded:

(in millions) 2020 2019 2018

2012 to

2017 Total

PSRHBF prefunding fixed amount $ — $ — $ — $ 33,900 $ 33,900

PSRHBF unfunded benefits amortization 810 789 815 955 3,369 51,865,000,000 Normal cost of retiree health benefits 3,850 3,775 3,666 3,305 14,596

CSRS unfunded retirement benefits amortization 1,817 1,617 1,440 1,741 6,615

FERS unfunded retirement benefits amortization 1,343 1,060 958 1,412 4,773 21,940,000,000

Total expenses accrued but unpaid $ 7,820 $ 7,241 $ 6,879 $ 41,313 $ 63,253 $ 21,038 As of the date of this report, the Postal Service has not incurred any penalties or negative financial consequences as a result of not making these payments.

Mitigating Circumstances

The Postal Service continues to pursue strategies within its control to increase operational efficiency and improve liquidity. The Postal Service has managed capital in recent years by spending what it believed was essential to maintain its existing facilities and service levels, to ensure employee safety and to increase efficiencies. However, some increases in capital investment are necessary to upgrade its facilities, fleet of vehicles and processing equipment in order to remain operationally viable. Aggressive management of the business operations and legislative and regulatory reforms that will enable it to increase revenue and reduce costs will all be necessary to restore the Postal Service to financial health.

The Postal Service’s status as an independent establishment of the executive branch that does not receive tax dollars for its operations presents unique requirements and restrictions, but also potentially mitigates some of the financial risk that would otherwise be associated with a cash shortfall. With annual total revenue in 2020 of approximately $73 billion, a financially sound Postal Service continues to be vital to U.S. commerce.

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The U.S. economy benefits greatly from the Postal Service and the many businesses that provide the printing and mailing services that it supports. Disruption of the mail would cause undue hardship to businesses and consumers as it would significantly inhibit the remittance of payments through the mail, as well as vital mail and packages like medicine, essential consumer staples, benefits checks, and important information. In the event of a cash shortfall, the U.S. government would likely prevent the Postal Service from significantly curtailing or ceasing operations. The Postal Service continues to inform the executive branch, Congress, the PRC and other stakeholders of the immediate and long-term financial challenges it faces and the legislative and regulatory changes that are required to restore its financial stability.

In the event that circumstances leave the Postal Service with insufficient liquidity, it would likely be required to implement additional contingency plans to ensure that its primary mission is fulfilled and that mail deliveries continue. These measures may require the Postal Service to prioritize payments to the FFB, employees and suppliers ahead of some payments to fund retirement and retiree health benefits, as has been done in the past.

NOTE 4 - REVENUE RECOGNITION

The Postal Service generates the majority of its revenue from contracts associated with the processing and delivery of different types of mail and packages, both domestically and internationally, which generally occur over a relatively short period of time (e.g., several days).

Disaggregation of Revenue

The following table summarizes the Postal Service’s disaggregated operating revenue for the three months ended December 31, 2020 and 2019, by each service category:

(in millions) 2020 2019*

Operating Revenue:

First-Class Mail $ 6,301 $ 6,478

Marketing Mail 4,165 4,411

Shipping and Packages 9,378 6,599

International 666 688

Periodicals 244 287

Other 741 888

Total operating revenue $ 21,495 $ 19,351

* Prior period amounts for certain service categories include reclassifications of amounts amongst service categories to conform to current period presentation. These reclassifications are immaterial for each affected category, and had no effect on total operating revenue for the period.

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Contract Liabilities

The following table presents the balances of the Postal Service’s contract liabilities, including Deferred

revenue-prepaid postage and prepaid PO Box and Caller Service fees, as of December 31, 2020 and September 30,

2020:

Deferred revenue-prepaid postage:

Forever stamps $ 1,568 $ 1,446

Mail-in-transit 732 589

Metered postage 307 329

Other prepaid postage 55

PO Box and Caller Service fees 252

NOTE 5 - RELATED PARTIES

As disclosed throughout this report, the Postal Service has significant transactions with other U.S. government entities, which are considered related parties for accounting purposes.

The following table presents related-party assets and liabilities as of December 31, 2020 and September 30, 2020:

Related-party assets:

Carrying amount of revenue forgone installment receivable1 _$ _{490 $} ₄₈₅

Related-party liabilities:

Current portion of debt $ 3,000 $ 3,000

Other current liabilities2 _66,895 _64,146

Long-term debt 11,000 11,000

Other noncurrent liabilities3 _17,230 _20,013

1 _{Included within}_{Other assets}_{in the accompanying}_{Balance Sheets}_{. See further discussion in}_{Note 12 - Fair Value Measurement.} 2_{Amounts include CSRS, FERS, PSRHBF and current workers' compensation obligations, as well as payables to other agencies.} 3_{Amounts include noncurrent workers' compensation obligations.}

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The following table presents related-party revenue and expenses for the three months ended December 31, 2020 and 2019:

(in millions) 2020 2019

Related-party operating revenue1 _$ _{294 $} ₂₆₉

Related-party operating expenses2 _$ _{4,499 $} _4,290

Related-party interest income3 _$ _{8 $} ₄₁

Related-party interest expense4 _$ _{39 $} ₆₀

1 _{Included within}_{Operating revenue}_{in the accompanying unaudited}_{Statements of Operations}_. 2 _{Included within}_{Operating expenses}_{in the accompanying unaudited}_{Statements of Operations}_.

3 _{Represents interest imputed on the revenue forgone installment receivable, as well as interest generated on U.S. Treasury instruments} and other cash equivalents held with the Federal Reserve Bank of New York. Included within Interest and investment income in the accompanying unaudited Statements of Operations.

4 _{Incurred on debt issued to the FFB, and included within}_{Interest expense}_{in the accompanying unaudited}_{Statements of Operations}_.

NOTE 6 - PROPERTY AND EQUIPMENT, NET

Assets within Property and equipment, net in the accompanying Balance Sheets are recorded at cost, which includes the interest on borrowings used to finance construction of major capital additions, less allowances for depreciation and amortization. Interest capitalized during both the three months ended December 31, 2020 and 2019 was not significant. Fixed assets are depreciated over estimated useful lives ranging from 3 to 40 years using the straight-line method.

For the three months ended December 31, 2020 and 2019, depreciation and amortization expense was approximately $419 million and $431 million, respectively. These items are included within Other operating

expenses in the accompanying unaudited Statements of Operations.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Collective Bargaining Agreements

The Postal Service has active contracts with the American Postal Workers Union, AFL-CIO ("APWU"), the National Postal Mail Handlers Union, AFL-CIO ("NPMHU") and the National Rural Letter Carriers Association ("NRLCA"). For additional information, see Item 8. Financial Statements, Notes to Financial Statements, Note

11 - Commitments and Contingencies in the Annual Report.

On November 25, 2020, the Postal Service reached a tentative agreement with the National Association of Letter Carriers, AFL-CIO (“NALC”) on a new 44-month collective bargaining agreement. The previous contract with the NALC expired on September 20, 2019. The tentative agreement is subject to ratification by the NALC members. As of the date of this report, the agreement is still pending ratification.

Contingent Liabilities

The Postal Service’s contingent liabilities consist primarily of claims resulting from labor and employment matters; asset retirement obligations and environmental matters; property damage and injuries on Postal Service properties; and issues arising from Postal Service contracts, personal claims and traffic accidents. Each quarter, the Postal Service evaluates each claim to determine its potential liability. If the Postal Service determines that an unfavorable outcome from a new claim is both probable and reasonably estimable, it records a liability for the amount. Preexisting claims are also reviewed and adjusted quarterly for resolutions or revisions to prior estimates based on new facts and circumstances.

The Postal Service is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its financial condition or operations. For additional information see Item 3.

Legal Proceedings and Item 8. Financial Statements, Notes to Financial Statements, Note 11 - Commitments

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Provision for Losses

The Postal Service has made adequate provision for probable losses arising from all claims. The following table presents contingent liabilities by current and noncurrent portions and by category, as of December 31, 2020 and September 30, 2020:

Current / noncurrent portions of contingent liabilities:

Current portion1 _$ _{96 $} ₁₀₃

Noncurrent portion2 ₁₉₇ ₁₈₈

Total contingent liabilities $ 293 $ 291

1 _{Included within}_{Payables and accrued expenses}_{in the accompanying}_{Balance Sheets}_. 2 _{Included within}_{Other noncurrent liabilities}_{in the accompanying}_{Balance Sheets}_.

Reasonably Possible Contingencies

The Postal Service does not accrue for contingencies which it deems reasonably possible of an unfavorable outcome. These ranged in amount from approximately $225 million to $1.1 billion at December 31, 2020, and from approximately $200 million to $1.1 billion at September 30, 2020.

NOTE 8 - RETIREMENT PLANS

The majority of career employees participate in one of two U.S. government defined benefit pension programs, CSRS and FERS, which are administered by the Office of Personnel Management (“OPM”). Associated costs include the FERS normal costs, contributions based on a percentage of active employee’s basic pay, and CSRS and FERS amortization costs to fund the remaining unfunded liabilities. These costs are recorded in Retirement

Benefits in the accompanying unaudited Statement of Operations. Employees who participate in FERS are also

eligible to receive matching retirement contributions to the Thrift Savings Plan (“TSP”), a defined contribution plan, and are eligible for Social Security, resulting in Social Security payroll taxes. However, the TSP and Social Security contributions are recorded in Compensation and Benefits in the accompanying unaudited Statement of

Operations.

In October 2020, OPM provided the Postal Service with an actuarial report indicating the projected annual amortization payments due September 30, 2021 would be approximately $1.8 billion for the CSRS obligation and approximately $1.3 billion for the FERS obligation. The Postal Service expects to receive the invoice from OPM for the actual amounts due September 30, 2021 during the fourth quarter of 2021, and this invoice may differ from the estimated projections and calculations due to further changes in experience and/or actuarial assumptions as of the calculation date.

The following table presents the retirement benefits expenses for the three months ended December 31, 2020 and 2019:

(in millions) 2020 2019

FERS normal costs $ 1,001 $ 946

CSRS unfunded retirement benefits amortization1 454 404

FERS unfunded retirement benefits amortization2 ₃₃₆ ₂₆₅

Total retirement benefits $ 1,791 $ 1,615

1 _{Expense for the accrual for the annual payment due to OPM by September 30 of the respective fiscal year, to amortize the unfunded} CSRS retirement obligation. Payments are to be made through 2043 based on OPM invoices.

2_{Expense for the accrual for the annual payment due to OPM by September 30 of the respective fiscal year, to amortize the unfunded} FERS retirement obligation. Payments are to be made over a 30-year rolling period based on OPM invoices.

For additional information, see Item 8. Financial Statements, Notes to Financial Statements, Note 12 -

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NOTE 9 - HEALTH BENEFITS PLANS

The Federal Employee Health Benefit (“FEHB”) Program covers nearly all career employees and also covers non-career employees and retirees who meet certain eligibility requirements. OPM administers FEHB and allocates the cost of funding the program to participating U.S. government employers. Separate from FEHB, the Postal Service offers its own healthcare plan to certain non-career employees who are ineligible for FEHB.

Active Employees

Postal Service employee health benefits expense (which includes the employer portion of Medicare taxes) is most significantly impacted by the number of employees electing coverage and the premium costs of the selected plans. Postal Service employee health benefits expense was approximately $1.3 billion for both the three-month periods ended December 31, 2020 and 2019. These expenses are included within Compensation

and benefits in the accompanying unaudited Statements of Operations.

Retirees

Postal Service retirees who participated in FEHB for the five years immediately preceding their retirement may continue to participate in the plan during retirement. Qualifying survivors of retirees are also eligible to receive benefits.

As required by PAEA, OPM annually performs an actuarial valuation for the purpose of developing a payment schedule for the Postal Service to fund the remaining unfunded PSRHBF obligation in annual payments through the year 2056. Based on preliminary calculations provided by OPM, the amortization payment due September 30, 2021 is estimated to be $900 million.

Furthermore, the Postal Service is obligated to pay the estimated normal cost of retiree health benefits attributable to the service of its employees during the most recent year. Based on preliminary information provided by OPM, the Postal Service has estimated the normal cost payment, also due by September 30, 2021, to be $3.9 billion.

The Postal Service expects to receive the invoice from OPM with the actual amounts due during the fourth quarter of 2021 and these may differ from the original projected amounts due to changes in discount rates, actuarial assumptions and experience as of the calculation date.

The following table details retiree health benefits expenses for the three months ended December 31, 2020 and 2019:

(in millions) 2020 2019

PSRHBF unfunded liability amortization1 _$ _{225 $} ₂₂₅

Normal cost of retiree health benefits2 ₉₇₅ _1,000

Total retiree health benefits expense $ 1,200 $ 1,225

1_{Expense for the accrual for the annual payment due to OPM by September 30 of the respective year, as calculated by OPM, to} amortize the unfunded PSRHBF retirement health benefit obligation. Payments are to be made through 2056 based on OPM invoices. 2_{Expense for the accrual for the annual payment due to the PSRHBF by September 30 of the respective year, based on information}

provided by OPM, for actuarially determined normal cost of retiree health benefits for current employees.

For additional information, see Item 8. Financial Statements, Notes to Financial Statements, Note 13 - Health

Benefits Plans in the Annual Report.

NOTE 10 - WORKERS' COMPENSATION

Postal Service employees injured on the job are covered by the Federal Employees’ Compensation Act (“FECA”), administered by the U.S. Department of Labor’s (“DOL”) Office of Workers’ Compensation Programs, which makes all decisions regarding injured workers’ eligibility for benefits. The Postal Service reimburses DOL for all workers’ compensation benefits paid to or on behalf of Postal Service employees, plus an administrative fee.

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Workers’ Compensation Liability

The Postal Service records a liability for its workers’ compensation obligations for employees who have been injured on the job and are eligible for benefits, or for their qualified survivors. Both the current and noncurrent portions of the workers’ compensation liability are recorded in the accompanying Balance Sheets. The Postal Service uses an estimation model that utilizes four generally accepted actuarial valuation techniques based upon past claim-payment experience and exposure to claims as measured by total employee hours worked. Changes in the liability are primarily attributable to the combined impacts of routine changes in actuarial assumptions, new compensation and medical cases, the progression of existing cases and changes in interest (discount) and inflation rates, including long-term cost of living adjustments (“COLA”) rates for compensation claims, and medical rates for medical claims. These rates are updated as of the balance sheet date and factored into the model.

To determine the liability each quarter, the Postal Service first estimates the future total cost of workers’ compensation claims based on the dates of claim-related injuries, frequency or severity of the injuries, the pattern of historical payments to beneficiaries and the expected trend in future costs. The Postal Service then calculates the amount that would need to be invested at current interest (discount) rates to fully fund the future total cost of claims, and this calculated present value is the recorded value of the workers’ compensation liability.

This liability calculation is highly sensitive to changes in discount rates. For example, a 1% increase in the discount rate would decrease the December 31, 2020 liability and related expense by approximately $2.2 billion. Likewise, a 1% decrease in the discount rate would increase the December 31, 2020 liability and related expense by approximately $2.8 billion.

The following table details the applicable inflation and discount rates for compensation and medical claims used to estimate the workers’ compensation liability as of December 31, 2020 and September 30, 2020:

December 31, 2020 September 30, 2020 Compensation claims liability:

Discount rate 1.28% 1.09%

Long-term wage inflation rate 2.60% 2.60%

Medical claims liability:

Discount rate 1.31% 1.12%

Medical inflation rate 3.50% 3.50%

As of December 31, 2020 and September 30, 2020, the Postal Service’s total liability for workers’ compensation was approximately $18.5 billion and $20.1 billion, respectively. As of December 31, 2020 and September 30, 2020, the current portion of the liability was approximately $1.3 billion and $1.3 billion, respectively, and the noncurrent portion of the liability was approximately $17.2 billion and $18.8 billion, respectively, as reflected in the accompanying Balance Sheets.

Workers’ Compensation Expense (Benefit)

The impacts of changes in discount rates and inflation rates, as well as the actuarial valuation of new cases and revaluation of existing cases, are components of total workers’ compensation expense (benefit) as recorded in the accompanying unaudited Statements of Operations. In addition, the Postal Service pays an administrative fee to DOL, which is considered a component of workers’ compensation expense (benefit).

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The following table presents the components of workers’ compensation expense (benefit) for the three months ended December 31, 2020 and 2019:

(in millions) 2020 2019

Impact of discount rate changes $ (479) $ (543)

Actuarial revaluation of existing cases (146) 17

Cost of new cases 326 303

Administrative fee 21 21

Total workers’ compensation benefit $ (278) $ (202)

For additional information, see Item 8. Financial Statements, Notes to Financial Statements, Note 14 - Workers'

Compensation in the Annual Report.

NOTE 11 - LEASES

The Postal Service holds lessee positions in real property leases as well as lessee positions embedded in service contracts involving rights to use transportation equipment and facilities.

Lease costs for operating leases for all non-cancellable leases are set forth below for the three months ended December 31, 2020 and 2019:

(in millions) 2020 2019

Operating lease cost $ 329 $ 448

Variable lease cost 183 178

Short-term lease cost 87 42

Total lease cost $ 599 $ 668

The following information represents supplemental cash and non-cash information as well as lease term and discount rate information separately for operating leases, for the three months ended December 31, 2020 and 2019:

($ in millions) 2020 2019

Operating cash flows from operating leases $ 336 $ 300

Right-of-use assets obtained in exchange for operating lease

liabilities $ 60 $ 81

Weighted-average remaining lease term - operating leases 5.38 years 5.35 years

Weighted-average discount rate - operating leases 1.62 % 1.72 %

For additional information, see Item 8. Financial Statements, Notes to Financial Statements, Note 15 - Leases in the Annual Report.

NOTE 12 - FAIR VALUE MEASUREMENT

The Postal Service defines fair value as the price that would be received upon sale of an asset or the price that would be paid to transfer a liability between unrelated parties.

The carrying amounts of certain current assets and liabilities, including cash, accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short-term nature. Assets within Property

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and equipment, net are recorded at cost and measured at fair value on a nonrecurring basis if they are determined to be impaired or classified as assets held for sale.

Noncurrent receivables and long-term debt are disclosed at fair value using inputs of the fair value hierarchy model. This model prioritizes observable and unobservable inputs used to measure fair value, and consists of three broad levels, as defined in authoritative literature.

The carrying amount and fair value of the revenue forgone installment receivable and long-term debt are presented for disclosure purposes only in the following table:

December 31, 2020 September 30, 2020

(in millions)

Carrying

Amount ValueFair Carrying Amount ValueFair

Revenue forgone installment receivable1 _$ _{490 $} _{546 $} _{485 $} ₅₇₉

Long-term debt2 _{$ 11,000 $ 11,764 $ 11,000 $ 11,881}

1 _{The carrying amount is included within}_{Other assets}_{(which includes items in addition to the revenue forgone installment receivable) in} the accompanying Balance Sheets.

2_{The fair value amount reflects the premium or discount associated with prepayment of all debt based on prevailing interest rates plus} any prepayment penalties, as applicable.

The revenue forgone installment receivable qualifies as a financial instrument in accordance with authoritative literature. To calculate its fair value, the Postal Service recognizes the imputed interest it is owed as interest income and estimates the value of this receivable using the interest method, which converts future cash flows to a single discounted amount using interest rates for similar assets, which are considered Level 2 inputs. The Postal Service then calculates the net present value of anticipated annual installment payments to be received, discounted by the 20-year U.S. Treasury Constant Maturity Rate, which was 1.45% and 1.23% as of December 31, 2020 and September 30, 2020, respectively.

The long-term debt also qualifies as a financial instrument. Because no active market exists for its debt with the FFB, the Postal Service estimates the fair value of the long-term debt by imputing future payments at discount rates provided by the FFB, considered Level 3 inputs. The FFB discount rates, based on U.S. Treasury Yield Curve Rates, ranged from 0.08% to 1.62%, with a weighted average of 0.38% as of December 31, 2020. The FFB discount rates ranged from 0.08% to 1.42%, with a weighted average of 0.32% as of September 30, 2020.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENTS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report describe the principal factors affecting the financial results, liquidity, capital resources and critical accounting estimates of the United States Postal Service (“Postal Service,” “USPS,” “we,” “our” and “us”). Our results of operations may be impacted by risks and uncertainties discussed here and in our Annual Report on Form 10-K for the year ended September 30, 2020 (“Annual Report”) filed with the Postal Regulatory Commission (“PRC”) on November 13, 2020. Such factors, many of which we cannot control or influence, may cause actual results to differ materially from those currently contemplated.

Our operating results for the three months ended December 31, 2020 are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). These results are not necessarily indicative of the results to be expected for the year ended September 30, 2021 and should be read in conjunction with our Annual Report. All references to years in this report, unless otherwise stated, refer to fiscal years beginning October 1 and ending September 30. All references to quarters, unless otherwise stated, refer to quarters within fiscal years 2021 and 2020.

Forward-looking statements contained in this report represent our best estimates of known and anticipated trends believed relevant to future operations. However, actual results may differ significantly from current

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estimates. Certain forward-looking statements included in this report use such words as “may,” “will,” “could,” “expect,” “believe,” “plan,” “estimate,” “project” or other similar terminology. These forward-looking statements, which involve a number of risks and uncertainties, reflect current expectations regarding future events and operating performance as of the date of this report. These risks include, but are not limited to, the effects of the novel strain of coronavirus (“COVID-19”) on our business, financial condition and results of operations. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

With our mandate to provide universal postal services to the nation, we serve consumer and commercial customers in the U.S. as well as internationally. Our operations include an extensive and integrated retail, processing, distribution, transportation and delivery network, and we operate throughout the U.S., its possessions and territories. We do not operate in segments; we report our performance as a single business.

The Postal Accountability and Enhancement Act (“PAEA”) classifies our products into two broad categories:

Market-Dominant and Competitive “products,” however, we use the term “services” in this document for consistency with other descriptions of services offered. The statutes under which we operate also establish certain requirements that affect our financial results, including obligations for retirement benefits within the Civil Service Retirement System (“CSRS”) and the Federal Employee Retirement System (“FERS”), and obligations for retiree health benefits including funding of the Postal Service Retiree Health Benefits Fund (“PSRHBF”). We must coordinate with the U.S. Office of Personnel Management (“OPM”) to address these obligations.

We have successfully implemented initiatives that have reduced the growth in certain costs by billions of dollars while offering new features for customers such as Informed Delivery. However, legal restrictions on pricing, service diversification and operations restrict our ability to cover our costs to provide prompt, reliable and efficient postal services to the nation.

As an independent establishment of the U.S. government, we have a unique mission to:

• Serve the American people and, through the universal service obligation, bind our nation together by maintaining and operating our unique, vital and resilient infrastructure;

• Provide trusted, safe and secure communications and services between the U.S. government and the American people, businesses and their customers, and the American people with each other; and • Serve all areas of our nation, making full use of evolving technologies.

We will carry out this mission by remaining an integral part of the U.S. government and providing all Americans with universal and open access to our unrivaled delivery and retail network; using technology, innovation and, where appropriate, private-sector partnerships to meet our customers’ changing needs; operating in a modern, efficient and effective manner; and remaining an employer of choice, including attracting and retaining high-quality employees.

RESULTS OF OPERATIONS

SUMMARY

The major factors that impact our operating results include overall customer demand, the mix of postal services and contribution associated with those services, volume of mail and packages processed through our network and our ability to manage our cost structure in line with declining levels of mail volume, increased competition in the more labor-intensive Shipping and Packages business and an increasing number of delivery points.

Effects of COVID-19

In March 2020, the World Health Organization (“WHO”) declared COVID-19 a global pandemic, which has since spread throughout the U.S. Given our mandate to provide universal postal services to the nation, we provide an essential service as part of the nation’s critical infrastructure and have continued to process and deliver mail and packages during the pandemic. We serve an imperative role in the U.S. economy as at least six days per

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week, and in some instances seven, our employees accept, process, transport, and deliver vital mail and packages like medicine, fundamental consumer staples, benefits checks, and important information.

The COVID-19 pandemic has continued to have a material impact on certain of our results of operations. As a result of the pandemic, and to a lesser extent, secular mail declines, our sales from mail services, has continued to decline during the first quarter of 2021. Meanwhile, our sales from Shipping and Packages, our most labor-intensive revenue stream, has continued to experience substantial growth as a result of the surge in e-commerce driven by the pandemic. While this shift contributed to increased cash flow and overall higher revenue results for the year, such results may not be sustained in future periods. Also, Shipping and Packages produces a lower contribution margin per revenue dollar due to higher associated labor and transportation expenses.

Three Months Ended December 31, 2020

As more fully described below in Operating Revenue and Volume, our operating revenue for the three months ended December 31, 2020 increased approximately $2.1 billion, or 11.1%, compared to the same period last year, driven by record holiday Shipping and Packages volumes that increased approximately 435 million pieces, or 25.0%, and contributed an increase of approximately $2.8 billion in revenue, compared to the same period last year. However, this increase was partially offset by combined decreases in First-Class and Marketing mail

volumes of approximately 1.4 billion pieces, or 4.0%, resulting in a decrease of revenue of $423 million, compared to the same period last year, due to systemic declines that have been exacerbated by the COVID-19 pandemic.

While we benefited significantly from the growth in Shipping and Packages, this revenue category is subject to intense competition from both national and local competitors. Although we believe consumer behavior has evolved during the pandemic as the nation has increasingly relied on the safety and convenience of e-commerce, we still expect this surge to partially abate as the economy opens, at which time, we expect certain major customers will return to diverting their volume from our network, and aggressively pricing their products and service in order to fill their networks and grow package density.

As more fully described below in Operating Expenses, our operating expenses for the three months ended December 31, 2020 increased approximately $1.1 billion, or 5.3%, compared to the same period last year, primarily driven by the following:

• Compensation and benefits expense increase of $771 million, or 6.2%, compared to the same period last year, resulting from higher work hours associated with the record holiday Shipping and Packages volumes and paid leave associated with the COVID-19 pandemic;

• Transportation expense increase of $204 million, or 8.5%, compared to the same period last year, primarily due to the impact of higher volumes on air and highway transportation; and

• Retirement benefits expense increase of $176 million, or 10.9%, compared to the same period last year, due to revised actuarial assumptions for CSRS and FERS unfunded retirement benefits amortization, which are outside of management’s control, and higher contributions for FERS normal costs consistent with general compensation increases.

Overall, we reported net income of $318 million for the three months ended December 31, 2020, compared to net loss of $748 million for the same period last year. Excluding the combined effects of non-cash workers' compensation adjustments due to fluctuations in interest rates and other actuarial revaluations, as well as a time-limited peak surcharge, the loss for the quarter would have been approximately $650 million.

Non-GAAP Controllable Income (Loss)

In the day-to-day operation of our business, we focus on costs that can be managed in the course of normal business operations, such as salaries and transportation. We calculate controllable income (loss), a non-GAAP measure, by excluding items over which we have no control, such as PSRHBF actuarial revaluation and amortization expenses, workers’ compensation expenses caused by actuarial revaluation and discount rate changes, and retirement expenses caused by actuarial revaluation. Controllable income (loss) should not be considered a substitute for net income (loss) and other GAAP reporting measures.

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The following table reconciles our GAAP net income (loss) to controllable income (loss) for the three months ended December 31, 2020 and 2019:

(in millions) 2020 2019

Net income (loss) $ 318 $ (748)

PSRHBF unfunded liability amortization expense1 ₂₂₅ ₂₂₅

Change in workers’ compensation liability resulting from

fluctuations in discount rates (479) (543)

Other change in workers’ compensation liability2 ₍₁₂₇₎ ₁₀

CSRS unfunded liability amortization expense3 ₄₅₄ ₄₀₄

FERS unfunded liability amortization expense4 336 265

Controllable income (loss) $ 727 $ (387)

1 _{Expense for the accrual for the annual payment due to OPM by September 30 of the respective year, as calculated by OPM, to} amortize the unfunded PSRHBF retirement health benefit obligation. Payments are to be made through 2056 based on OPM invoices. 2_{Net amounts include changes in assumptions, valuation of new claims and revaluation of existing claims, less current year claim}

payments.

3 _{Expense for the accrual for the annual payment due to OPM by September 30 of the respective fiscal year, to amortize the unfunded} CSRS retirement obligation. Payments are to be made through 2043 based on OPM invoices.

4 _{Expense for the accrual for the annual payment due to OPM by September 30 of the respective fiscal year, to amortize the unfunded} FERS retirement obligation. Payments are to be made over a 30-year rolling period based on OPM invoices.

We had controllable income of $727 million for the three months ended December 31, 2020, compared to a controllable loss of $387 million for the same period last year, a difference of approximately $1.1 billion. This change was largely driven by the approximately $2.1 billion increase in operating revenue, partially offset by higher compensation and benefits expenses of $771 million, higher transportation expenses of $204 million and higher FERS normal costs of $55 million. These items are discussed in greater detail in Operating Revenue and

Volume and Operating Expenses below.

OPERATING REVENUE AND VOLUME

Although we operate as a single segment, we monitor and report revenue by mail classes, products and shapes. We use the following broad service categories to describe and report on our performance: First-Class

Mail, Marketing Mail, Shipping and Packages, International Mail, Periodicals, and Other services. Additional

information on these service categories can be found in Item 1. Business, Services and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations, Operating

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The following table summarizes our operating revenue and volume for the three months ended December 31, 2020 and 2019, by each service category:

(in millions) 2020 2019

Operating Revenue:

First-Class Mail1 _$ _{6,301 $} _6,478

Marketing Mail2 _4,165 _4,411

Shipping and Packages3 _9,378 _6,599

Periodicals 244 287

Other4 ₇₄₁ ₈₈₈

Total operating revenue $ 21,495 $ 19,351

Volume:

First-Class Mail1 _13,735 _14,329

Marketing Mail2 _19,514 _20,302

Shipping and Packages3 _2,173 _1,738

Periodicals 944 1,109

Other5 ₈₈ ₉₅

Total volume 36,585 37,811

1_Excludes_{First-Class Package Service - Retail}_and_{First-Class Package Service - Commercial}_. 2_Excludes_{Marketing Mail Parcels}_.

3_Includes_{Priority Mail}_,_{USPS Retail Ground}_,_{Parcel Select Mail}_,_{Parcel Return Service Mail}_,_{Marketing Mail Parcels}_,_{Package Service}

Mail, First-Class Package Service - Retail, First-Class Package Service - Commercial and Priority Mail Express.

4 _{Revenue includes}_{PO Box}_services,_{Certified Mail}_{, Return Receipts, Insurance, Other Ancillary Services, Shipping and Mailing Supplies,} Collect on Delivery, Registered Mail, Stamped Envelopes and Cards, Money Orders and Other services.

5 _{Volume includes Postal Service internal mail and free mail provided to certain congressionally mandated groups.}

On September 4, 2020, the PRC approved our plan to increase prices on certain Shipping and Packages subcategories on a time-limited basis. These increased prices were effective October 18, 2020 through December 27, 2020, after which prices reverted to the 2020 pricing schedule.

On October 9, 2020, we filed with the PRC a notice of our intent to increase prices for certain Market-Dominant services by an average of 1.7%. On November 18, 2020, the PRC approved these price increase plans. The approved prices went into effect on January 24, 2021.

On November 16, 2020, we filed with the PRC a notice of our intent to increase prices for certain Competitive services. The average price increases vary by Competitive services product. On December 9, 2020, the PRC approved these price increase plans. The approved prices went into effect on January 24, 2021.

First-Class Mail

For the three months ended December 31, 2020, First-Class Mail revenue decreased $177 million, or 2.7%, on a volume decline of 594 million pieces, or 4.1%, compared to the same period last year. The most significant factor contributing to the declining trend in First-Class Mail volume was the continuing migration from mail to electronic communication and transaction alternatives. Revenue declined at a slower rate than volume due to the January 2020 price increase applicable to certain Market-Dominant services.

Marketing Mail

For the three months ended December 31, 2020, Marketing Mail revenue decreased $246 million, or 5.6%, and volume declined 788 million pieces, or 3.9%, compared to the same period last year. For the three months ended December 31, 2020, our revenue and volume from political and election mailincreased by nearly $400